7817 Annual Report 2009.qxd - Shire

Shire plc Annual Report and Accounts 200973Notes to the consolidated financial statements In millions of US dollars, except where indicated1 DESCRIPTION OF OPERATIONSShire plc (the ‘Company’) and its subsidiaries (collectively referred to as either ‘Shire’ or the ‘Group’) is a leading specialty biopharmaceutical companythat focuses on meeting the needs of the specialist physician.The Group has grown through acquisition, completing a series of major mergers or acquisitions that have brought therapeutic, geographic and pipelinecapabilities, which are in line with Shire’s strategy of specialist biopharmaceuticals. The Group will continue to evaluate companies, products andproject opportunities that offer a good strategic fit and enhance shareholder value.Shire’s strategic goal is to become the leading specialty biopharmaceutical company that focuses on meeting the needs of the specialist physician.Shire focuses its business on attention deficit hyperactivity disorder (‘ADHD’), human genetic therapies (‘HGT’) and gastrointestinal (‘GI’) diseasesas well as opportunities in other therapeutic areas to the extent they arise through acquisitions. Shire’s in-licensing, merger and acquisition efforts arefocused on products in specialist markets with strong intellectual property protection and global rights. Shire believes that a carefully selected andbalanced portfolio of products with strategically aligned and relatively small-scale sales forces will deliver strong results.2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(a) Basis of preparationThe accompanying consolidated financial statements include the accounts of Shire plc, all of its subsidiary undertakings and the Income Access Sharetrust, after elimination of inter-company accounts and transactions. Noncontrolling interests in the equity and earnings or losses of a consolidatedsubsidiary are reflected in ‘Noncontrolling interest in subsidiaries’ in the Group’s consolidated balance sheet and consolidated statements of operations.Noncontrolling interest adjusts the Group’s consolidated results of operations to present the net income or loss attributable to the Group’s exclusiveof the earnings or losses attributable to the noncontrolling interest.(b) Use of estimates in consolidated financial statementsThe preparation of consolidated financial statements, in conformity with accounting principles generally accepted in the United States (‘US GAAP’) andSecurities and Exchange Commission (‘SEC’) regulations, requires management to make estimates and assumptions that affect the reported amountsof assets and liabilities, disclosure of contingent assets and liabilities at the date to the consolidated financial statements and reported amounts ofrevenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are primarily madein relation to the valuation of intangible assets, the valuation of equity investments, sales deductions, income taxes and provisions for litigation.(c) Revenue recognitionThe Group recognizes revenue when:— there is persuasive evidence of an agreement or arrangement;— delivery of products has occurred or services have been rendered;— the seller’s price to the buyer is fixed or determinable; and— collectability is reasonably assured.Where applicable, all revenues are stated net of value added and similar taxes, and trade discounts. No revenue is recognized for consideration,the value or receipt of which is dependent on future events or future performance.The Group’s principal revenue streams and their respective accounting treatments are discussed below:Product salesRevenue for the sale of products is recognized upon shipment to customers or at the time of delivery to the customer depending on the terms of sale.Provisions for rebates, product returns and discounts to customers are provided for as reductions to revenue in the same period as the related salesare recorded. The Group monitors and tracks the amount of sales deductions based on historical experience to estimate the reduction to revenues.Royalty incomeRoyalty income relating to licensed technology is recognized when the licensee sells the underlying product, with the amount of royalty incomerecorded based on sales information received from the relevant licensee. The Group estimates sales amounts and related royalty income basedon the historical product information for any period that the information is not available from the relevant licensee.Licensing revenuesOther revenue includes revenues derived from product out-licensing agreements. These arrangements typically consist of an initial upfront paymenton inception of the license and subsequent milestone payments dependent on achieving certain clinical and sales milestones.Initial license fees received in connection with product out-licensing agreements, even where such fees are non-refundable and not creditable againstfuture royalty payments, are deferred and recognized over the period in which the Group has continuing substantive performance obligations.Milestone payments which are non-refundable, non creditable and contingent on achieving certain clinical milestones are recognized as revenues eitheron achievement of such milestones if the milestones are considered substantive or over the period the Group has continuing substantive performanceobligations, if the milestones are not considered substantive. If milestone payments are creditable against future royalty payments, the milestones aredeferred and released over the period in which the royalties are anticipated to be paid.